W.W. Grainger, Inc. — Q2 2022 Form 10-Q
Business context and period. Grainger is a business-to-business distributor of maintenance, repair and operating products and services, operating primarily in North America, Japan and the U.K. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
- Q2 revenue: $3.837 billion, up 19.6%. High-Touch Solutions N.A. sales rose 22.2% to $3.053 billion; Endless Assortment sales rose 11.4% to $719 million. Other businesses contributed $65 million.
- Q2 earnings and margins: Gross profit was $1.441 billion, up 28.3%; gross margin was 37.6%, up 2.6 percentage points. Operating earnings were $534 million, up 60.0%. Net earnings attributable to Grainger were $371 million, up 64.5%; diluted EPS was $7.19, up 68.4%.
- Six-month results: Revenue was $7.484 billion, up 19.0%; gross profit was $2.824 billion and gross margin was 37.7%, up 2.5 percentage points. Operating earnings were $1.068 billion, up 54.4%; Grainger-attributable net earnings were $737 million, up 59.1%; diluted EPS was $14.26, up 62.8%.
- Cash flow: First-half operating cash flow was $593 million, compared with $563 million in 2021. Investing used $172 million, including $163 million of additions to property, equipment and intangibles. Financing used $388 million, including $199 million of treasury-stock purchases and $183 million of dividends. Cash ended the period at $262 million, versus $241 million at year-end 2021.
- Liquidity and debt: Working capital was $2.664 billion; the current ratio was 2.6, versus 2.7 at December 31, 2021. Grainger reported approximately $1.5 billion of available liquidity and said existing cash, securities and credit availability should meet liquidity needs for the next 12 months. Total debt, as defined by the company to include lease liabilities, was 52.3% of total capitalization, down from 56.2%. Long-term debt was $2.309 billion, with $17 million of current maturities; credit ratings were investment grade.
Material changes and management commentary
- Management attributed Q2 sales growth mainly to both reportable segments. In High-Touch N.A., reported sales growth included volume/product mix of 11.8% and price/customer mix of 10.6%, partly offset by foreign exchange. For the first half, the corresponding contributions were 10.9% and 9.4%.
- Gross-margin expansion reflected comparison with pandemic-related inventory adjustments in 2021 and improved product mix in 2022. Management also cited freight efficiencies in Endless Assortment.
- Q2 SG&A rose 14.9% to $907 million, primarily on higher marketing, payroll and variable compensation. Endless Assortment operating earnings grew more slowly than revenue, reflecting increased SG&A; reported operating earnings were $62 million, up 8.0%.
- Working capital increased $209 million from year-end, primarily from higher receivables and inventory associated with sales growth, partly offset by higher payables. Management said operating cash flow benefited from higher earnings but was partly offset by unfavorable working capital and increased tax payments.
- Foreign exchange weighed on reported Endless Assortment sales: the Q2 yen impact was unfavorable by 9.7%; first-half impact was unfavorable by 8.4%. The company recorded first-half foreign-currency translation losses of $109 million in other comprehensive income.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or EPS guidance. Management said it expects to invest in the business and return excess cash through dividends and repurchases, funded primarily by operating cash flow.
- Management reported limited direct exposure to Russia and Ukraine and did not expect significant disruption to the overall business, but said broader effects remain uncertain. It highlighted inflation and disruptions in commodity, labor and transportation markets, which can affect product costs and availability; mitigation strategies were being implemented while seeking to remain price competitive.
- Other disclosed risks include COVID-19 effects, supply-chain and labor constraints, fuel and transportation costs, competition, foreign exchange, cybersecurity, regulatory matters and economic conditions. Management said risk factors had not materially changed from prior disclosures.
- Grainger faces product-liability litigation related to the 2019 KMCO refinery explosion, involving approximately 186 plaintiffs; a first bellwether trial involving six plaintiffs was scheduled for early 2023. Related property-damage and insurance-reimbursement suits also seek unspecified damages. The company intends to contest the matters and said it could not predict outcomes, but did not expect their resolution to materially adversely affect consolidated financial condition or results.
- No goodwill impairment was recorded or indicated in the period. The board declared a $1.72-per-share quarterly dividend on July 27, 2022, payable September 1, 2022.
Key facts for investors to verify
- Whether sales and margin growth persist as pricing, product mix and comparisons with 2021 inventory adjustments evolve.
- Whether receivables and inventory growth convert to cash, and how working capital affects operating cash flow.
- The effect of yen and other currency movements on Endless Assortment and consolidated results.
- Developments in the KMCO litigation, including trial outcomes, insurance coverage and any change in the company’s assessment.
- Future capital returns and investment spending, given the filing’s lack of specific full-year financial guidance.